China commodities: Goldman Sachs turns more constructive on copper but cuts China coal assumptions as supply reform accelerates

Overview

This China commodities field-trip report assesses near-term supply, demand, policy and regulatory developments across copper, coal and aluminum. Goldman Sachs concludes that copper’s supply balance is becoming tighter, whereas a faster-than-expected restoration of coal output weakens the coal-price outlook; aluminum supply risks from Yunnan hydropower and overseas-investment rules appear more limited.

Core views

Goldman Sachs conducted 23 meetings and site visits across Beijing, Jiangxi, Jiangsu and Shanghai, including discussions with copper recyclers and smelters, coal and steel producers, traders, EV and construction-equipment dealers, battery and power-station operators, and policy specialists. Its overall conclusion is more positive for copper, negative for Chinese coal, and moderate on risks from overseas direct investment (ODI) policy and Yunnan hydropower under a potential super El Nino. For copper, the central bullish argument is a prolonged disruption to domestic scrap supply. China supplies 2.8mnt of copper contained in scrap annually, or 14% of domestic demand, but stricter reverse-invoicing inspections and the removal of local-government subsidies since 2Q26 have interrupted scrap flows. Goldman Sachs estimates that roughly 500kt per year of copper-in-scrap could remain stranded for an extended period. A consultant expects scrap-processing volumes to fall by 400-500kt in 2026E. The report attributes the bottleneck to fragmented collection: compliance can imply tax equivalent to roughly 40% of the copper price, collectors face possible retrospective tax investigations, and the RMB5mn annual reverse-invoicing quota limits an individual collector to about 45 tonnes of collection volume and less than RMB10k of annual profit. Goldman Sachs expects resolving these structural issues to require a multi-year shift toward larger, diversified recycling platforms. The scrap disruption is reinforced by weak smelter economics. At spot treatment charges of about negative US$225/t to negative US$94/t, domestic smelters are in deep losses; one smelter indicated unit losses exceeding RMB10k/t before around RMB3k/t of sulphuric-acid credit. Contract TC of US$146/t remains profitable when that credit is included, but declining spot TCs create risk to 2027E contract negotiations and deeper domestic and overseas smelter cuts. China refined-copper output declined 2-4% year on year in July-August 2026, equivalent to an annualized 290-570kt reduction. The report expects refined-copper production to fall in 4Q26E and 2027E as maintenance restarts are delayed and raw-material availability stays tight. Copper demand feedback was mixed but not enough to offset the supply concern. A cable manufacturer reported a 10% year-on-year increase in its 9M26 orderbook but a 9% decline in copper consumption; demand was strong in data centres, shipbuilding, wind and exports, but weak in power-grid, infrastructure and property-linked cable. A trader also estimated annualized DRC copper production cuts of 0.2mnt amid higher sulphur prices and deteriorating margins at non-integrated SXEW refiners. In the trader’s view, these disruptions and tightening scrap supply support a more constructive copper outlook than aluminum; the trader expected copper to reach US$15k/t in 2027E if additional supply disruptions occur. Goldman Sachs reiterates Buy ratings on Chinese copper equities including Zijin and CMOC. The coal conclusion is materially more cautious. Safety enforcement after the Shanxi accident in May had left monthly output 11% below earlier-year levels, while QHD5500 thermal coal exceeded RMB1,000/t. However, policymakers have refocused on supply security. Goldman Sachs estimates that increased local SOE output, mine restarts and ramp-ups could add more than 500mnt, or 11% of the Chinese market, with a further 8% capacity stretch possible if needed. The report identifies 242mnt of probable 4Q26 additions and 273mnt of potential additions; by 1H27, 280mnt of trial-commissioning capacity and a possible 120mnt of reserve capacity could be added. SOEs, which account for about 70% of Shanxi capacity, are expected to carry most of the production increase. Coal-market feedback already points to easing. Local mines and washing plants began destocking after the September 18 NEA and NDRC circular on ensuring safe and stable production and supply; utilization at some nearby mines had risen from 40-50% to 50-60%. Mongolia met-coal imports are expected to exceed 100mnt in 2026E, compared with 53mnt in 8M26A. Speakers expected thermal coal to correct to RMB800-850/t, with potentially deeper correction in met coal. Goldman Sachs therefore lowers its 2027E QHD thermal-coal forecast to RMB750/t from RMB850/t and expects tight markets in 4Q26 to ease and potentially overshoot by 1H27. The lower coal-price assumptions drive earnings, target-price and rating changes. Chinacoal’s 2027-28E earnings estimates are cut by 8-19%; its 12-month targets are reduced to HK$12.50 for H shares from HK$17.50 and RMB16.00 for A shares from RMB22.00. Goldman Sachs downgrades both Chinacoal H and A to Neutral from Buy, describing valuation as fair within their historical ranges. Yankuang’s 2027-28E earnings estimates are cut by 15-17%; targets fall to HK$10.00 for H shares from HK$14.00 and RMB14.00 for A shares from RMB18.00. Yankuang H is downgraded to Sell from Neutral and Yankuang A remains Sell. Shenhua’s 2027-28E earnings estimates are reduced by 8-9%, targets are lowered to HK$42.00 and RMB45.00, and both H and A shares remain Neutral. Broader domestic demand remains weak. Construction machinery dealers described activity as 10-20% below year-ago levels, citing property weakness, slow non-key infrastructure execution and constrained local-government finances. A property consultant expects land sales and property starts each to decline 30%, and speakers generally expect property weakness to extend through 2027. Domestic EV demand has not shown its usual seasonal 30-40% month-on-month pickup, although selected innovative models retain two to three months of order backlog and exports remain strong outside the United States. ESS battery orderbooks were strong and production plans were full into 1Q27, but aggressive capacity-expansion plans and uneven returns from deregulated power spot markets create execution risks for ESS investment. Steel demand is weak in infrastructure, factory buildings and cold-rolled coil, while elevated met-coal and coke costs keep margins depressed. For aluminum, Goldman Sachs sees limited near-term risk from Yunnan hydropower shortages. A potential super El Nino could weaken hydro resources in 4Q26 and create a moderate risk window in 1Q27E, but new wind and solar additions should make the overall power-supply impact manageable and less severe than the 2023 drought episode. Nuozhadu inflow was around 3,700m³/s versus roughly 7,000m³/s in the comparable 2025 period, though water levels remained within a normal-year range. The aluminum capacity cap is viewed as intact at 45mnt, but output can exceed designed capacity by 5-10% through higher current, at the cost of shorter cell life and higher anode consumption. Recycled aluminum supply could exceed 30mnt annually within five years, versus 17mnt currently including imports. The new ODI regulation, effective July 1, 2026 under State Council Order No. 837, is expected to introduce timing and compliance uncertainty rather than broadly obstruct Chinese resource investment. MOFCOM approval procedures are expected to remain largely unchanged, while NDRC reviews may take longer because of more comprehensive project assessments. The regulation is viewed as supportive of strategic resources, with less disruption expected for copper, aluminum and uranium. Lithium conversion processing and rare-earth mining face export controls, while transfer of rare-earth separation and refining overseas is prohibited. A delay of 550kt of Indonesian aluminum capacity from 4Q26E to 1Q27E could reduce Indonesian output growth by 0.13mnt in 2026E and 0.43mnt in 2027E relative to Goldman Sachs estimates.

Analysis framework

The report combines field-trip interviews and site visits with supply-demand analysis, policy interpretation, company earnings revisions and relative valuation. It traces commodity outcomes from operational evidence—scrap flows, smelter economics, mine utilization, import logistics, power availability and end-market demand—to price assumptions, then applies those assumptions to covered coal-company earnings, target prices and ratings.

Methodology notes

• Industry AnalysisSupply-demand framework

  Commodity supply-demand analysis

  Goldman Sachs uses field evidence on scrap availability, smelter margins, coal capacity, imports and end-market demand to assess price direction for copper, coal and aluminum.

• Valuation methodsPB valuation

  Historical P/B versus ROE correlation

  Coal target prices are derived using historical relationships between price-to-book multiples and forecast ROE, with the valuation base rolled from 2026E to 2027E.

• Industry AnalysisUpstream-Midstream-Downstream Transmission

  Supply-chain transmission

  The report links invoicing rules and scrap collection to processors and smelters, and links coal production policy to commodity prices, producer earnings and equity ratings.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Chinacoal-H (1898.HK) / Chinacoal-A (601898.SS)

  Covered coal producers affected by lower 2027E coal-price assumptions and expected supply easing.

  Strengths

  Large China coal producer with 136mnt of self-mined sales in 2025A.

  Weaknesses

  Earnings estimates are cut 8-19% for 2027-28E; valuation is viewed as fair relative to history.

  Comparison

  2027E P/E of 7.8x for H and 11.7x for A versus historical averages of 2.0x-10.0x and 5.0x-15.0x, respectively.

  Risks

  Coal prices, renewable substitution, oil prices, safety and environmental disruptions, and ramp-up of Libi and Weizigou mines.

• Yankuang-H (1171.HK) / Yankuang-A (600188.SS)

  Covered coal producers exposed to lower coal prices and revised earnings forecasts.

  Strengths

  One of the largest coal producers in China and Australia, with 165mnt of self-mined sales in 2025A.

  Weaknesses

  2027-28E earnings estimates are cut 15-17%; Goldman Sachs views risk-reward as unattractive.

  Comparison

  Yankuang H has a -14% implied downside versus 11% average upside for Goldman Sachs commodities coverage.

  Risks

  Higher coal or oil prices, slower renewable substitution, mine-supply disruption, faster new-mine ramp-up and potential parent asset injections could improve earnings.

• China Shenhua Energy-H (1088.HK) / China Shenhua Energy-A (601088.SS)

  Covered coal producers affected by reduced coal-price assumptions.

  Weaknesses

  2027-28E earnings estimates are cut 8-9% and targets are lowered.

  Comparison

  Both share classes remain Neutral.

  Risks

  Coal prices, renewable substitution, oil prices, production disruptions and new-mine project execution.

• Zijin / CMOC

  Chinese copper equities benefiting from the report’s more constructive copper-supply outlook.

  Strengths

  Goldman Sachs reiterates Buy ratings.

  Risks

  Further demand weakness or an easing of copper-supply constraints could challenge the constructive view.

Key data

• Stranded domestic copper scrapc.500kt per annumEstimated copper-in-scrap likely to remain stranded for an extended period.
• China scrap supply2.8mnt copper content annually; 14% of demandDomestic copper scrap supply before the 2Q26 disruption.
• China refined-copper output-2% to -4% YoY in July-August 2026Equivalent to a 290-570kt annualized decline.
• Spot copper TCUS$-225/t to US$-94/tEstimated spot range; contract TC was US$146/t including sulphuric-acid credit.
• 2027E QHD thermal coal forecastRMB750/tReduced from RMB850/t.
• Potential coal supply increase11% of China market plus 8% further flexibilityBased on probable and potential capacity additions.
• Chinacoal 2027-28E earnings revision-8% to -19%Primarily reflects lower coal-price assumptions.
• Yankuang 2027-28E earnings revision-15% to -17%Primarily reflects lower thermal- and PCI-coal assumptions.
• Yunnan hydropower inflowc.3,700m³/sLatest Nuozhadu inflow versus c.7,000m³/s in the same period of 2025.
• Delayed Indonesian aluminum capacity550ktShifted from 4Q26E to 1Q27E amid ODI-policy and equipment-delivery delays.

Impact & implications

The report sees copper as supported by constrained scrap and smelter supply despite uneven downstream demand. In contrast, a faster coal-output recovery changes the expected balance from tightness in 4Q26 toward possible oversupply by 1H27, underpinning lower coal-price assumptions and weaker earnings outlooks for covered coal producers. Aluminum and strategic-resource investment face policy and weather uncertainty, but Goldman Sachs judges the immediate disruption risk as limited to moderate.

Risks

• Copper-scrap disruptions may stabilize in 2027E if compliance rates rise, reducing the supply-tightness argument.
• Coal prices could differ materially from assumptions as supply-demand fundamentals and government price controls change.
• Faster or slower renewable-energy substitution could alter coal demand and utilization.
• Safety and environmental inspections can disrupt coal production and change supply conditions.
• El Nino-related hydropower conditions in Yunnan depend on water storage and could affect aluminum output.
• ODI reviews may take longer or impose stricter compliance requirements for selected overseas resource projects.

What to watch

• The outcome of 2027E copper TC/RC negotiations and whether negative spot TCs trigger deeper smelter production cuts.
• Progress in domestic copper-scrap invoicing compliance and whether stranded scrap returns to the market.
• Shanxi SOE production increases, mine restarts and the 1H27 ramp-up of trial-commissioning coal capacity.
• QHD thermal-coal prices and the scale of met-coal imports from Mongolia.
• China construction, property, EV and ESS demand trends, including local-government financing and power-station project execution.
• Yunnan reservoir levels through September-October 2026 and hydropower conditions in 1Q27E.
• Processing timelines and compliance effects under the new ODI regulation.